Pros: Partial shares, dollar cost averaging, IPO participation, no inactivity fees, competitive money market rate
Cons: No real time quotes, no advanced trading features, sell costs are comparatively high
(**Review has been updated to include a new ShareBuilder feature: Options trading. Comments added at bottom.)
I've been a devoted ShareBuilder user for nearly 2 years, and an amateur investor for 10 years. My previous experiences have been with E-Trade, TDWaterhouse (TDAmeritrade), and Dean Witter.
The main concept of ShareBuilder that makes them unique is they are a discount broker that allows you to purchase partial shares. While their commissions arent bad, and in some cases are very good (from $19.95 to $1 per trade); being able to buy partial shares is the true innovation theyve given to the amateur trader. A partial shareholder is entitled to the same risks/rewards as a full shareholder, including dividends. Of course low commissions are important, and this is ShareBuilders main advertising point; but keep in mind that no matter what the commission is, you typically have to be able to afford a whole share in order to buy something.
Buying whole shares is probably not a deterrent if you want to buy Sirius Satellite radio (currently under $4). But what about a stock thats more expensive? With ShareBuilder you can actually buy $2 worth of Berkshire Hathaway B shares (around $3,300 per share ). Thats 0.06% ownership of one share that you can own. No traditional broker would allow that. (Note: Even ShareBuilder wont allow you buy Berkshire A shares.) And lets face it, if you can afford a whole share of Berkshire B, youre probably not too concerned about the difference between $1 and $16 for a commission anyway.
Now, at the risk of completely jading this review, I must say that I believe for amateur investors such as myself, with a small portfolio and limited funds, ShareBuilder is extraordinary. It is one of the most innovative and worthwhile services of its kind on the Internet. I believe ShareBuilder actually helps level the playing field of Wall Street. That sounds like a tall order, but considering my example above with Berkshire Hathaway, ShareBuilder allows an amateur investor to put money into the same high quality stocks as professional investors, and at the same proportions. That means that even a small asset base can be structured and built over time to be an incredibly diverse and broad-ranging group of stocks, regardless of share price. Theoretically, you could have a portfolio that literally matches the S&P 500 for a minimum investment of $1440 including commissions (if you had the $1 trade plan) and the minimum allowed $2 purchase. Of course it would take over 2 years, and the percentage of each stock you owned would be different, but it could happen.
So, how does ShareBuilder really work?
Once you open and fund an account, you can invest in 2 ways: First, you can invest through real-time trading (or limit orders). In this way ShareBuilder is no different than any other broker. You enter a market or limit order for a stock (full shares only), you buy immediately or when the limit price hits, and you pay the commission. Real time trades with no extra costs are $15.95, limit orders are $19.95, but both get cheaper with a plan. This isnt the best deal around, but then real time trades are not why you normally use ShareBuilder.
The other way to invest, the primary method, is through an automatic investment plan. The purpose of this plan is to allow you to buy into a stock cheaply, at a fixed cost, over time. This method allows you to dollar-cost-average each of your holdings. The theory being that eventually the overall value of the stock will go up above your costs, and even if you make mistakes, youll hedge your losses and make money. You calculate your gains by the total amount of money you put in, and subtract that from the current value of your holdings.
To create a plan, you select the stocks you want to buy and the dollar amount you want to invest in each stock. You also choose whether you want to invest weekly, bi-weekly, or monthly. You submit your order, and the order goes through every Tuesday. If you choose bi-weekly, it would be every other Tuesday, or monthly. You have until 5pm (eastern time) on the Monday before your order goes through to finalize your selections. (If there is a market holiday on a Monday, you must finalize your order by the Friday before.)
If you have no pre-set plan, the cost is $4 per trade to buy. As long as your plan remains active, the plan will re-order automatically the same stocks you selected on every specified Tuesday. You can modify or stop the plan at any time up until the Monday deadline. (I have actually been able to cancel certain automatic investment purchases after the Monday deadline up to about an hour before the market opened. I have the Advantage plan I dont know if thats true with the other plans).
The funding for your purchase comes from cash you electronically deposit into your ShareBuilder account beforehand, or it can be drafted automatically from your bank account each week. Electronic deposits to or from a linked bank account are free. Only one account is permitted to be setup at a time. Funds transferred will be available the next day if you put in the transfer request before 5pm eastern. You dont have to fund your account to open it, but you do have to make sure that you can afford to cover the amount that will be drafted for your periodic in-plan buy orders.
Note: There are some strategies unique to ShareBuilder that can be utilized to increase returns. For instance, if you don't just let your investment elections sit there automatically - if you actively monitor and control your periodic buys, you can stack the dollar-cost cards in your favor to increase the averages.
What are the account options and the plans?
You can open the following ShareBuilder account types: Individual, Joint, IRA (traditional or Roth), Educational, or Custodial. The accounts are free to open and maintain, but the IRA has a $25 yearly fee, and ESA a $15 fee. You can open your account with a $0 starting balance.
Once the account is open, you choose which plan you would like to have - if any. The plans are Basic, Standard, and Advantage. Youre actually registered for the Basic plan which has no obligation to trade, just for signing up. Also depending on your plan, you may have access to certain tools that ShareBuilder provides. For example, a tool called Gainskeeper is available with Advantage, which helps you to track your dollar-cost gains. (I havent found it to be entirely accurate so I seldom use it).
The Basic plan: no strings attached
With the Basic Plan, automatic purchases (if set it up) will cost you $4 per trade to buy. You can buy one or many stocks. Real time trades cost $15.95. The beauty of the Basic plan is that you dont have to setup a plan. You dont even have to trade anything. There arent any inactivity fees. You can fund the account whenever you like, and you can trade whenever you like. No activity, no cost. Even if you fund the account and dont trade, the money earns interest in a competitive money market account. (There are a few fees as noted above with IRA/ESA account types regardless of activity.)
A few strings, but only if you dont think ahead: Standard and Advantage plans
The Standard Plan is the middle plan. Real time trades are $14.95, but it also costs you a subscription fee of $12 per month. This fee is automatically deducted from your credit card each month whether you purchase stock or not. Thats a string youll have to consider. However, if you plan to actually use your ShareBuilder account to build a portfolio, that $12 is really your commission cost. The $12 fee entitles you to 6 free trades per month when you use the automatic investing system. That works out to $2 per trade if you use all 6 trades in a month. If you go over 6 per month, its $2 extra for each additional trade in-plan.
If you find yourself going over 8 or 9 trades (for in-plan buys) per month, youll want to consider the Advantage Plan. This plan is $20 per month, and is automatically deducted from your credit card. But this plan entitles you to 20 free trades each month, which works out to $1 per trade if you use your plan. Again, youre charged $20 per month regardless of activity. But considering that youre only spending $1 per stock to buy any stock offered, and since you can buy a minimum of $2 worth of a stock, its not too outrageous. If youre serious about saving/investing, you should be putting away at least that much anyway. The other bright side to the Advantage plan is that real time trades cost you less: $11.95, which is relatively competitive, but which brings me to the REAL catch in the whole system: selling.
The catch: selling
(Ok, its not really a catch, but its something you need to consider)
By now you should understand how cheap and easy it is to buy into practically any stock that ShareBuilder offers. And you can invest minimally by buying only a portion of a stock, as little as $2 worth. But on the flip side, buying cheap can lull you into a sense that everything is cheap. You must remember that when selling your $2 portion of a stock, it will cost you your real time trade price. That can become quite expensive if you dont have a good long term strategy.
Paying real time prices to sell a stock is not unlike any other broker, and at least with ShareBuilder you hopefully didnt spend more than $4 per trade to buy something. But heres where ShareBuilder can present a problem if you dont have a clear long-term plan for what youre doing. When you convert your costs to percentages, even if your holdings have done well, you may find that youre losing because of the simple fact that ShareBuilder allowed you to invest so minimally. If your holdings havent increased in a big way, you may find that you can lose quite a bit.
Lets say youre prepared to invest $24 each month. You want to put that into some hot stocks you heard about (hopefully researched) using your ShareBuilder Standard plan (6 free buys). You buy 6 stocks each month, investing $4 in each. After 5 months you manage to accumulate $20 worth of each company. Then, one of your stocks suddenly takes off, and the price doubles. Now your $20 investment in that stock is worth $40, and you want to sell and take your gains. You sell this stock, ShareBuilder subtracts $14.95 for commission (Standard plan price), leaving you $25.05. Thats a $5.05 profit on your $20 investment, which is a 25% return after 5 months. Not too bad, but now factor in the $2 per trades over 5 months from the Standard plan, and you actually spent $24.95 in total commissions, which leaves you $15.05 after you sell. Meaning you actually lost $4.95, which is a -25% negative return on your initial investment! Thats quite a bit less than your 100% gain in value! Why? Because you were able to buy so few shares, and ShareBuilder ate up your profits.
Now, of course the same scenario could happen if you used a traditional broker, but consider this: If you had used a typical discount broker that charged say, $9.99 for commission, and you saved up your money and bought a full share of stock for $20, then the same thing happened and the stock doubled, you would have spent $19.98 on total commissions instead of the $24.95 you had to spend with ShareBuilder to get the same amount of stock. You would have been better off not using ShareBuilder.
And thats if your stock doubles. In reality, most of your stocks probably wont double in 5 or 6 months, and might even lose value, further compounding your losses if you had to sell.
And heres one more bad-choice scenario that ShareBuilder could uniquely put you in Lets say you listened to experts, and you believed that a truly diverse portfolio would mirror the S&P 500. With ShareBuilder it actually wouldnt be impossible. If you had the Advantage plan ($1 pre-paid commission in-plan to buy, $2 minimum - not sure why), and you purchased 5 different stocks from the S&P each week investing $2 in each, you could have almost 1/2 of the S&P after a year: 240 stocks. It would have cost you $720 ($1 commission plus $2 in stock x 20 trades per month x 12 months). But if you needed to close out your account, it would cost you $2,868 to sell them all. Theres no high math needed to see thats a loss. (Luckily there are a few ETF's available through ShareBuilder that allow to do this with only one stock purchase.)
As you can see, with ShareBuilder it can be quite easy over-diversify, and lose your money if you were to need it. If you dont plan correctly, you might as well consider your investment money lost. You should only invest using ShareBuilder for the long term, and have a plan going forward, as well as an exit strategy.
The good and the bad, which isnt too bad
For day traders, ShareBuilder is not a good idea. For one, real time market quotes are not available. There are no extensive day-trading tools or trackers for active traders. Also, the commission structure is such that its relatively expensive to do real-time trades often. But oddly enough Ill say this is a good thing for the amateur investor. Its difficult to trade real-time knowing that youve already paid for a certain number of free trades each month. This forces you to slow down, research, and think about your purchases. Its much easier to wait until Monday afternoon to see what happens to a stock youre unsure of during the week, than to feel pressured into buying immediately. In fact, it takes a lot of faith to day-trade using your automatic (low commission) plan. If you put in a high dollar buy order on Monday night trying to turn a quick profit on a small percentage increase, it can be nerve racking knowing that your trade won't settle until sometime the next day. The keyword here: sometime; because in-plan trades are not instant when the market opens. They may not even go through until after hours Tuesday for certain foreign and ADR stocks.
Also, ShareBuilder does not allow trading on margin, and you cant trade options. However, if youre new to market investing Ill consider these to be good things as well. And another good thing for the amateur is that ShareBuilder only allows you to buy from a list of 6000 pre-selected stocks and ETFs (exchange traded funds). You cant buy highly speculative or volatile pink sheet or penny stocks (which in my opinion are highly manipulated; I've learned about that the hard way).
Another good, rather amazing aspect of ShareBuilder is that if you do crave more risk, you can actually participate in certain selected IPOs if you qualify. This is also virtually unheard of for amateur investors with other brokers.
If you have a sensible, long term strategy, ShareBuilder can be very valuable tool. It allows you to buy into the market at your own comfort level and pace. It can also allow you to make progressively better deals buying into a stock if youre diligent, which will maximize your gains. It actually lends itself very well to a phrase Ill call some-days trading. Meaning that you dont trade every day, but you use ShareBuilder to your advantage by adjusting your purchases according to the market, and selling when appropriate.
But just like any investment, the fewer of something you own, the higher percentage that something must go up before you break-even on commissions. ShareBuilder makes it possible to own the minimum, and in doing so may make it virtually impossible to earn any gains at all. If your investments are too miniscule, youd be better off with a savings account. With ShareBuilder, you may have to hold a stock for an extraordinarily long time, and accumulate a lot of it. And of course the longer you accumulate, the more buy commissions youre paying, which only subtracts from your gains. Using a traditional broker, you might have saved up enough money in advance (in an interest bearing account) to have bought full shares with more dollars, which would have lowered your percentage cost, and allowed the stock to go up less for you to make a gain.
Sharebuilder is not for everyone, but if you follow the adage that you must pay to play, ShareBuilder allows you to get into the market and play (not in the day-trading sense) almost immediately and initially quite cheaply. In fact, one final positive is that it allows you to 'play' by receiving dividend income. If you find a high yielding dividend stock that you like, you can get in immediately with limited cash, and the percentage payout is the same. Just be careful with your buys, know which plan you'll need, and research. And be ready to commit to a stock for a long time if need be.
-Express funding (New feature for real-time trades. Allows you to fund a purchase directly from your linked bank account without having to first transfer the money and wait overnight)
-Dollar cost averaging
-Real time and limit order trading
-No inactivity fees or initial obligations
-Competitive money market rates
-Options trading (New)
-No real time quotes
-No margin accounts
-In-plan trades may take a long time to settle on Tuesdays
-Real-time sell commissions are expensive compared to buy commissions
**NEW FEATURE: STOCK OPTIONS**
In the past couple of weeks, ShareBuilder said they listened to customer feedback (I know I was one), and they now offer equity (stock) options trading.
You have to be approved for stock options trading, so I waited until I was approved and had a chance to try it a little before commenting. Here is my very initial assessment...
ShareBuilder has two options trading levels: Level 1 and Level 2. You are granted one of these levels based on information you give to them in your options application.
With Level 1 you can:
-Write a Covered Call
-Close a Covered Call
-Perform a Buy / Write (Buy a stock position and write a covered call)
-Perform an Unwind (Close a covered call and sell a stock position)
With Level 2 you can do what you can with Level 1, plus:
-Buy a call
-Buy a put
-Sell a call
-Sell a put
I was approved for level 2, but I have only so far bought a few calls and puts. I have not yet excercised my options, nor have any expired, so this is very preliminary review.
Overall the options experience is intuitive. Targeted at the amature investor, ShareBuilder has some good learning tools and resources. They also claim to limit you to pre-selected options, but I havn't run into any particular stock options being blocked yet. To put in an order, you simply look up the option chain, select your order type, and put in the order. Just like buying a stock really.
Options are not included as an option (no pun intended) in your automatic investment plan. Therefore all options transactions are charged at $1 per contract, plus your real-time trading market rate per transaction (depending on your plan - discussed above). So buying a single option contract (the right to buy 100 shares of stock X at a set price), would cost you your real-time rate, plus $1. To buy 2 contracts would be your real-time rate, plus $2 and so on.
Overall, the option to buy and sell options is nice to have. While I haven't delved too deep into this realm of trading, it's a good way to take on more risk if you so choose and leverage your money a little more, and if you can stay on top of things. Conversely, if you're willing to write off the expenses, being able to buy 'put' options is a decent form of 'insurance' against your current share-built holdings.
That's about the extent of my opinion so far. Will update as I have more experience in the future....